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The New Finmeccanica: Europe’s Soft Underbelly? |
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(Source: defense-aerospace.com; published Feb. 1, 2005)
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By Giovanni de BRIGANTI
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PARIS --- While the agreements announced last week by Italy’s Finmeccanica are significant in many respects, they most importantly mark Italy’s emergence as a major player on the European aerospace scene. This long-standing goal was pursued by successive Italian governments, whose dreams of equaling French or German industrial strength were however stymied by the insufficient size of their domestic industry.
Italy felt squeezed out by France and Germany during the first phase of European consolidation, because its government proved less willing – and less able – than its French and German counterparts to provide the necessary funding and political backing.
But thanks to a policy focused on improving Finmeccanica’s financial health, to partial privatization and to strong political backing to development programs in which Finmeccanica units are involved, Italy’s competitive position in Europe’s defense industry has substantially improved.
Now, with a complex network of partnerships and joint ventures with European and US companies, Finmeccanica is emerging as a power of its own, and all the more so as the recent selection of its EH-101 by the US Navy as the next US Presidential helicopter vindicates its long-standing policy of pragmatic industrial links with US prime contractors.
The new EuroSystems company, announced Jan. 28, will consolidate Finmeccanica’s holdings in the defense electronics field and combine them with the avionics business of BAE Systems, through which Finmeccanica hopes to gain access to the US defense market. Initially, BAE will retain 25% of EuroSystems, but Finmeccanica has an option to buy it out, much as it bought out British engineering group GKN’s 50% share in Agusta Westland.
The second agreement announced Jan. 28, with France’s Alcatel, will establish Europe’s largest space group by creating two satellite-related joint ventures, one focused on manufacturing, the other on services, with combined annual sales of more than 2.1 billion euros ($2.74 billion). Alcatel and Alenia Spazio, Finmeccanica’s space unit, are already teamed to bid against a rival EADS/Thales team for the concession for Galileo, Europe’s future satellite navigation network.
Through its various units, Finmeccanica already has significant minority stakes in some of Europe’s larger defense programs, such as the Eurofighter combat aircraft (21%), the NH90 transport helicopter (32%), the Eurosam family of surface-to-air missiles and the Meteor medium-range air-to-air missile. Finmeccanica also owns 25% of European missile manufacturer MBDA.
In Italy, Finmeccanica has acquired sole control of Aermacchi, a manufacturer of training aircraft, and also owns 30% of aero engine manufacturer Avio, the remaining 70% of which are owned by the Carlyle Group.
On top of these holdings in Italy and in Europe, Finmeccanica also has substantial business activities in the US, where it is arguably better established – because more diversified - than any other European defense contractor.
Its Alenia Aeronautica unit is a risk-sharing partner in Boeing’s 787 Dreamliner as well as the 767 tanker program. Alenia is also partnering Lockheed-Martin, both on the Joint Strike Fighter, in which Italy has invested $1.028 billion as a Level 2 partner, and on the C-27J twin-engined military transport aircraft, which uses the same systems and components as the C-130J.
Finmeccanica’s Agusta Westland is partnered with Bell Helicopter to develop the AB-139 utility helicopter and the BA-609 civil tilt-rotor, as well as now being sole proprietor of the EH101 helicopter program which last week won the US Navy’s VXX competition.
This relatively strong position, however, should not hide some of the company’s competitive weaknesses. First of all, it is a true holding company, which inevitably generates a discount in its share price. The fact that its subsidiaries do not publish audited accounts of their own can also be considered by some investors as a further cause of concern, and can make borrowing more expensive.
But the real shortcoming in Finmeccanica’s strategic position is that it is only a junior partner in most if not all of the programs it is involved in. This difficulty is compounded by the fact that the Italian state is also a junior partner in the same programs, giving “Team Italy” little clout to influence events or contracts to its advantage. There is no major European program – except, now, for the EH101 - in which Finmeccanica is the undisputed leader, nor even the dominant partner.
In civil aerospace, finally, Finmeccanica is not an Airbus partner, but has linked its destiny with that of Boeing, Airbus’ greatest rival. Like Boeing, it is thus betting the farm that airlines will prefer smaller jets for city-to-city flights over large aircraft for hub-and-spoke operations, and has done little to hedge its bet. It also is tied with Lockheed to the troubled C-130J, thereby missing out on the very promising Airbus A400M which, currently, has no competitor as a C-130 replacement.
Together, these factors will limit the role Finmeccanica’s can play in the European defense and aerospace sector.
Another way to view this, of course, is that Finmeccanica has the best of both worlds: it is able to participate in competing European programs because it leads none, and, thanks to its strong credentials as a European firm with historical US partnerships, it is able to hunt for contracts both in Europe and in the United States.
As things stand today, both views of Finmeccanica’s potential are equally valid. Only time will tell whether the company’s strategy is effective or whether, as long hoped by American defense officials, it will turn out to be the “soft underbelly” through which U.S. industry can penetrate and disrupt Europe’s defense industry.
-ends-
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